Ben covers the property industry and has a keen interest in
entrepreneurship and travel writing. He speaks Mandarin and
previously covered housing and urban affairs for The Australian
Financial Review.

Property investment: Pick the right neighbours and win

So-called second best suburbs are enjoying strong growth as buyers hunt for more affordable options.

By most measures, the housing market is picking up around the country. Motivated by low interest rates, rising rents and greater confidence in the economy, prospective buyers are once again flocking to house inspections, and values are on the rise.

But it’s early days yet. Figures from research firm RP Data show the number of homes changing hands is tracking about 14 per cent lower than the average for the past five years, which were hardly glory years for the real estate industry. Few analysts are expecting the broad-brush capital gains that happen in boom years, and investors will need to choose carefully to get a good return.

They might do well to look past the most popular suburbs. RP Data figures prepared exclusively for BRW show the suburbs where demand is now strongest for houses aren’t the relatively wealthy blue-chip suburbs, but those surrounding them where the price tags are lower.

Clearly, home buyers remain cautious and are hunting for value, and this has implications for which areas will see the best capital growth this year.

Perth real estate agent Jenny Hughes has seen Perth’s housing market boom and bust before, but she was surprised how quickly demand increased after Christmas. In the years following the financial crisis she says a typical four-bedroom, two-bathroom house in Craigie, in Perth’s northern suburbs, would cost $350,000 to $370,000. Now homes like this go for more than $450,000.

“It’s turned around really quickly since December,” says Hughes, a director at Realmark Real Estate. “In a lot of cases [houses] have been 25 or 26 days on market.

“When we were going through the hard markets you were looking at 60 days or 50 days.”

Suburbs such as Craigie and others in the Joondalup area of northern Perth are a relatively long commute to the city, but buyers appear to view this as a satisfactory trade-off for a lower price tag.

Similar trade-offs are taking place in Sydney, where it is not the brand-name suburbs like Newtown or Annandale that are in demand, so much as the cheaper suburbs next door, like Enmore and St Peters.

So, too, in Adelaide, where it is the suburbs surrounding prestigious Mitcham, where homes are selling the fastest, rather than Mitcham itself.

RP Data’s analysis looks at the average number of days properties are on the market before achieving a sale, and pinpoints the suburbs where listings are snapped up the fastest. It is these suburbs where the supply-demand equation is tipping in favour of demand – a key ingredient to future price growth.

Less popular suburbs surge

RP Data-Rismark figures show capital city home values rose by 1.2 per cent in the three months to the end of February, with Adelaide and volatile Darwin the only capital cities to see falls in value. But despite the more positive mood, RP Data head of research Tim Lawless says poor affordability and weak first home-buyer activity are leading home hunters to take a second look at less popular neighbourhoods for value.

“You find it’s the areas that are still fairly well located,” Lawless says. “They’re not in the absolutely outer precinct of the city, they’re along good transport lines, but aren’t necessarily the most popular or more expensive suburbs. This makes a lot of sense. First home-buyer activity has really fallen off the cliff, and most of the demand is coming from that broad middle sector. They’re focused on areas that are still relatively affordable.”

Heathcote and Barden Ridge in Sydney’s Sutherland Shire are among the fastest-selling areas, RP Data reports, and that’s not because of the spotlight the canned television series The Shire cast upon the area.

In Heathcote, local Cripps & Cripps agent Sebastian Viteri just sold a three-bedroom 1950s cottage that had recently been updated for $560,000. He says stock in the area is low, and properties sell quickly.

“It’s one of the more affordable locations in the Sutherland Shire,” Viteri says. “Barring Menai, it’s about as good value as you’re going to get.”

In Brisbane, real estate network Place Estates Agents’ chief executive Damian Hackett says demand is strongest in the middle ring suburbs between seven and 10 kilometres from the central business district.

In suburbs like Camp Hill, Northern Park and Ashgrove, long-held family homes are being sold to younger generations and subdivided into smaller dwellings.

But he questions how suburbs like Mount Gravatt and Redbank came to feature on RP Data’s list, saying demand in those areas is likely to improve in several years after demand strengthens in the inner city.

Macquarie Capital real estate strategist Rod Cornish says the figures are in line with what he is seeing.

“Generally I think the story is right: it’s the mid-median priced suburbs, and in many cases it’s suburbs that are located next to more high-priced suburbs,” Cornish says. “[Buyers are] going to more affordable suburbs while trying to get close to the facilities of more expensive suburbs.”

It is these areas that respond first to interest rate cuts, Cornish says, while wealthier markets are more closely aligned with the health of the global economy and the sharemarket.

And they are more attractive to investors, because mid-priced properties are easier to tenant and bring relatively high rental yields.

Lawless says the findings have implications for housing investors. While it is ideal to get in before a suburb starts picking up, many of these suburbs have seen a plunge in values in recent years and are cheaper than they once were.

“I would be surprised, if you bought now, if you were buying at the top of the market,” Lawless says. “There is probably some growth to [come].

“Another tactic buyers use is to look at markets that are performing quite well, and look to the surrounding markets. You find as demand increases it tends to ripple across to surrounding suburbs as well.”

Posh suburbs for units

A separate analysis of suburbs where apartments, rather than houses, were selling the fastest, had a greater number of blue-chip suburbs like Annandale and Greenwich in Sydney, and Camberwell and Caulfield South in Melbourne.

“Where buyers really want to locate in a suburb that is considered blue chip or very popular, they simply can’t afford the high price tag of a house,” Lawless says.

“Quite often buying a unit or townhouse or villa is the next best option. I think we have seen those trends gathering pace over the past year as well.”

While maintaining his outlook that the year will be a slow one for housing, Lawless says early signs are that he could be proven wrong.

“My broad view is we will still see relatively subdued conditions. It’s reasonable to expect values will match wages growth, rising by 3.5 to 4.5 per cent over the year,” Lawless says.

“But in saying that, the first couple of months started out a lot stronger than I would have expected.

“The daily index for the month to date for March is pretty strong. I wouldn’t be surprised if we saw a month-on-month figure of 1 per cent or even higher. Whether that is sustained remains to be seen.”